Quippo Telecom Infrastructure Ltd., New Delhi v. ACIT, New Delhi

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH `F: NEW DELHI BEFORE SHRI G.E. VEERABHADRAPPA VICE PRESIDENT AND SHRI C.L.SETHI JUDICIAL MEMBER. I.T. A. NO.4931/DEL/2010 ASSESSMENT YEAR: 2007-08 QUIPPO TELECOM INFRASTRUCTURE LTD. ASSTT. COMMISSI ONER OF INCOME-TAX D-2 5 TH FLOOR SOUTHERN PARK VS. CIRCLE 14(1) NEW DELHI . SAKET NEW DELHI. PAN: AAACQ1279N (APPELLANT) (RESPONDENT) APPELLANT BY: SMT. ALKA ARREN CA. RESPONDENT BY: SHRI H.K. LAL SR.DR. O R D E R PER C.L. SETHI JUDICIAL MEMBER: THE PRESENT APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER DATED 30.08.2010 PASSED BY THE COMMISSIONER OF INCO ME-TAX (APPEALS) IN THE MATTER OF AN ASSESSMENT MADE UNDER SEC. 143(3) OF THE INCOME-TAX ACT 1961 (THE ACT) PERTAINING TO THE ASSESSMENT YEAR 2 007-08. 2. GROUND NOS.1(A) TO 1(C) ARE DIRECTED AGAINST THE CIT(A)S ORDER IN CONFIRMING THE DISALLOWANCE U/S 14A OF RS.19 58 253 /- ON ACCOUNT OF EXPENDITURE INCURRED TO EARN EXEMPT DIVIDEND INCOME BY APPLYING THE PROVISION OF RULE 8D. 2 3. IN THIS CASE THE ASSESSEE FILED ITS RETURN OF I NCOME ON 31.10.2007 SHOWING TOTAL INCOME AT `NIL. THE CASE WAS SELECT ED FOR SCRUTINY AND NOTICE U/S 143(2) WAS ACCORDINGLY ISSUED AND SERVED UPON T HE ASSESSEE. THE ASSESSEE APPEARED AND FILED REPLIES AND DOCUMENTS BEFORE THE A.O. THE ASSESSEE IS IN THE BUSINESS OF PROVIDING PASSIVE IN FRASTRUCTURE TO TELECOM INDUSTRY. DURING THE ASSESSMENT PROCEEDINGS IT WA S NOTICED BY THE AO THAT THE ASSESSEE HAS MADE INVESTMENT OF RS.10 00 50 000 /- IN THE SHARES AND MUTUAL FUNDS. THE AO THEN ASKED THE ASSESSEE TO GI VE DETAIL OF EXPENSES WHICH WERE INCURRED TO EARN EXEMPT INCOME FROM INVE STMENTS MADE IN SHARES AND MUTUAL FUNDS. IN REPLY THERETO THE ASS ESSEE SUBMITTED THAT IT HAD NOT EARNED ANY EXEMPT INCOME DURING THE YEAR INVES TMENTS IN SHARES AND MUTUAL FUNDS WERE MADE THROUGH THE INTERNAL FUNDS A ND NO BORROWED FUND WAS UTILIZED FOR THIS PURPOSE. THE ASSESSEES REPL Y IN THIS REGARD HAS BEEN REPRODUCED BY THE AO IN THE ASSESSMENT ORDER. THE ASSESSEES REPLY WAS CONSIDERED BY THE AO. THE AO HAD TAKEN A VIEW THAT REQUIREMENT OF SEC. 14A IS ONLY THAT EXPENDITURE SHOULD BE INCURRED FOR THE PURPOSE OF EARNING EXEMPT INCOME AND IT IS NOT NECESSARY THAT SOME INC OME IS ACTUALLY EARNED TO DISALLOW ANY EXPENDITURE RELATING THERETO UNDER SEC . 14A OF THE ACT. THE AO THEREFORE APPLIED THE PROVISIONS OF RULE 8D AND WORKED OUT THE TOTAL AMOUNT OF EXPENSES DISALLOWABLE U/S 14A OF THE ACT. 3 4. BEING AGGRIEVED THE ASSESSEE PREFERRED AN APPEA L BEFORE THE LEARNED CIT(A). 5. AFTER CONSIDERING THE AOS ORDER ASSESSEES SUB MISSIONS AND THE FACTS OF THE CASE THE CIT(A) DECIDED THE ISSUE AGAINST T HE ASSESSEE BY OBSERVING AND HOLDING AS UNDER:- 7. I HAVE CAREFULLY CONSIDERED THE FACT OF THE CAS E AND THE SUBMISSIONS MADE BY THE LD. AR. IT IS NOTED THAT T HE APPELLANT COMPANY WAS INCORPORATED ON 01.07.2005 AND IT START ED ITS OPERATION DURING THE A.Y. 2006-07. THIS IS THE SEC OND YEAR OF BUSINESS. THE APPELLANT HAS SHOWED LONG TERM INVES TMENT OF RS.10 00 50 439/- IN SHARES AND MUTUAL FUNDS. THE AO HAS OBSERVED IN THE ASSESSMENT ORDER THAT THE APPELLANT HAS PAID AN AMOUNT OF RS.1 11 24 120/- ON ACCOUNT OF INTEREST E XPENSES NOT ATTRIBUTABLE TO ANY SPECIFIC INCOME ARE RECEIPT. SECTION 14A OF THE I.T. ACT CLEARLY PROVIDES THE EXPENDITURE INCUR RED IN RELATION TO INCOME NOT DEDUCTIBLE FROM TOTAL INCOME . SUB-SEC. (2) PROVIDES THE MECHANISM. SUB-SECTION (3) PROVID ES THAT THE SECTION IS APPLICABLE IN RELATION TO CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER THE I.T. ACT. IT IS NOTED THAT THE SPECIAL BENCH OF MU MBAI ITAT IN THE CASE OF M/S. DAGA CAPITAL MANAGEMENT (P) LTD. H AS CLEARLY SETTLED THE CONTROVERSY REGARDING THE APPLI CABILITY OF RULE 8D. RULE 8D PROVIDES THE PROCEDURE BY WHICH DISALLOWANCE U/S 14A IS TO BE COMPUTED. THE A.O. H AS COMPUTED THE DISALLOWANCE AS PER THE PROCEDURE PROV IDED IN RULE 8D. 7.2 IT IS A FACT THAT THE APPELLANT COMPANYS MANAG ERIAL AND ADMINISTRATIVE MANPOWER HAS BEEN UTILIZED IN TAKING THE COMPLICATED DECISIONS REGARDING THE INVESTMENTS WHI CH HAVE YIELDED EXEMPT INCOME ACCORDINGLY DISALLOWANCE UND ER 14A IS NECESSARY IN THE INSTANT CASE. I DO NOT AGREE WITH THE PLEA OF THE APPELLANT THAT PROVISION OF SUB SECTION (2) OF 14A ARE NOT APPLICABLE IN THE PRESENT CASE. RATHER TIS PROVIS ION CLEARLY 4 STATES THAT THE DISALLOWANCE U/S 14A WILL BE MADE B Y PRESCRIBED METHOD AND THE PRESCRIBED METHOD IS RULE 8D. THERE FORE IT IS CRYSTAL CLEAR THAT THE PROVISION OF SECTION 14A(2) ARE APPLICABLE IN THE INSTANT CASE BECAUSE RULE 8D HAS BEEN BROUGH T TO STATUTE TO AVOID THE GUESS WORK IN ESTIMATION. THE WORKING OF DISALLOWANCE UNDER RULE 8D IS VERY SPECIFIC WHICH DOES NOT LEAVE ANY SCOPE FOR SUBJECTIVITY. ACCORDINGLY THE CONTENTION OF THE APPELLANT CAN NOT BE ACCEPTED. IN VIEW OF THE DECISION OF SPECIAL BENCH MUMBAI ITAT (SUPRA) ON THIS ISSUE CATEGORICALLY HOLDING THAT RULE 8D IS PROCEDURAL IN NATURE I HOLD THAT DISALLOWANCE MADE BY THE AO UNDER RULE 8D IS CORRECT UNDER THE NORMAL PROVISIONS OF THE ACT OR WHILE COMPUTING BOOK PROFITS UNDER MAT AND THUS NO INTER FERENCE IS CALLED FOR IN THIS REGARD. ACCORDINGLY THESE GROU NDS OF APPEAL ARE REJECTED. 6. HENCE THE ASSESSEE IS IN FURTHER APPEAL BEFORE US. 7. WE HAVE HEARD BOTH THE PARTIES AND HAVE CAREFULL Y PERUSED THE MATERIAL ON RECORD. 8. ON PERUSAL OF LEARNED CIT(A)S ORDER WE FIND TH AT THE CIT(A) HAS CONFIRMED THE ASSESSING OFFICERS ACTION BY APPLYIN G THE DECISION OF ITAT SPECIAL BENCH MUMBAI IN THE CASE OF DAGA CAPITAL MA NAGEMENT PVT. LTD. (2008) 119 TTJ 289 (MUM.) AND HAS THUS APPLIED TH E METHOD PROVIDED UNDER RULE 8D OF THE INCOME-TAX RULES. AT THIS STA GE IT IS PERTINENT TO NOTE THAT THE DECISION OF SPECIAL BENCH OF TRIBUNAL IN T HE CASE OF DAGA CAPITAL MANAGEMENT PVT. LTD. (SUPRA) HOLDING THAT RULE 8D I S RETROSPECTIVE IN NATURE HAS BEEN OVER-RULED BY THE HONBLE BOMBAY H IGH COURT IN THE CASE OF GODREJ BOYCE VS. DCIT (2010) 43 DTR 177 (BOM.) WHERE IT HAS BEEN 5 HELD THAT RULE 8D WOULD BE APPLICABLE ONLY ON AND F ROM ASSESSMENT YEAR 2008-09 ONWARDS AND NOT PRIOR TO ASSESSMENT YEAR 20 08-09. IN THE LIGHT OF THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CA SE OF GODREJ BOYCE VS. DCIT (SUPRA) WE SET ASIDE THE ORDERS OF THE AUTHOR ITIES BELOW AND HOLD THAT NO DISALLOWANCE UNDER SEC. 14A SHALL BE MADE BY APP LYING THE METHOD PROVIDED UNDER RULE 8D OF THE INCOME-TAX RULES IN T HE PRESENT ASSESSMENT YEAR WHICH IS PRIOR TO ASSESSMENT YEAR 2008-09. HO WEVER THE AO SHALL BE AT LIBERTY TO IDENTIFY ACTUAL EXPENDITURE WHICH HAD BEEN INCURRED FOR THE PURPOSE OF MAKING AND EARNING DIVIDEND INCOME FROM THE INVESTMENT IN SHARES AND MUTUAL FUNDS AS SO OBSERVED BY THE HONB LE HIGH COURT IN THE CASE OF GODREJ BOYCE VS. DCIT (SUPRA). WE THEREFOR E RESTORE THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER FOR HIS F RESH ADJUDICATION IN THE LIGHT OF OUR OBSERVATIONS AS MADE ABOVE. THE ASSESSEE S HALL BE AT LIBERTY TO PUT FORWARD ALL SUCH LEGAL CONTENTIONS AND SUBMISSIONS AS HE MAY BE ADVISED IN CONNECTION WITH THE QUANTIFICATION OF EXPENSES IF ANY INCURRED FOR THE PURPOSE OF MAKING AND EARNING DIVIDEND INCOME FROM INVESTMENT IN SHARES AND MUTUAL FUNDS. THE AO SHALL DECIDE THE ISSUE IN THE LIGHT OF THE PROPOSITION LAID DOWN BY THE HONBLE BOMBAY HIGH CO URT IN THE CASE OF GODREJ BOYCE (SUPRA) AND AFTER PROVIDING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 6 9. GROUND NO.2 IS DIRECTED AGAINST THE CIT(A)S ORD ER IN CONFIRMING THE AOS ACTION IN MAKING ADDITION OF RS.19 58 253/- BE ING EXPENDITURE INCURRED TO EARN EXEMPT INCOME WHILE COMPUTING BOOK PROFIT UNDER SEC. 115JB OF THE ACT. 10. WE HAVE HEARD BOTH THE PARTIES AND HAVE CAREFUL LY PERUSED THE MATERIAL ON RECORD. 11. IN THE PRESENT CASE THE AO HAS ALSO MADE ADDIT ION OF RS.19 58 253/- ON ACCOUNT OF ALLEGED EXPENDITURE INCURRED TO EARN EXEMPT INCOME WHILE COMPUTING BOOK PROFIT U/S 115JB OF THE ACT. THE AO S ACTION HAS BEEN CONFIRMED BY THE CIT(A). BOTH THE AUTHORITIES HAVE APPLIED RULE 8D OF THE INCOME-TAX RULES WHILE COMPUTING THE AMOUNT OF EXPE NDITURE DISALLOWABLE U/S 14A OF THE ACT. AS ALREADY HELD ABOVE THE PRO VISIONS OF RULE 8D ARE NOT APPLICABLE TO THE PRESENT ASSESSMENT YEAR UNDER CONSIDERATION. THEREFORE DISALLOWANCE OF EXPENDITURE BY APPLYING RULE 8D IS NOT JUSTIFIED. FURTHER NO ACTUAL EXPENDITURE WAS DEBITED IN THE P ROFIT & LOSS ACCOUNT RELATING TO THE EARNING OF EXEMPT INCOME. THEREFOR E THE PROVISION OF SECTION 14A CANNOT BE IMPORTED INTO WHILE COMPUTING THE BOOK PROFIT U/S 115JB OF THE ACT INASMUCH AS CLAUSE (F) OF EXPLANAT ION TO SEC. 115JB REFERS TO THE AMOUNT DEBITED TO THE PROFIT & LOSS ACCOUNT WHICH CAN BE ADDED BACK TO THE BOOK PROFIT WHILE COMPUTING BOOK PROFIT U/S 115JB OF THE ACT. IN THIS 7 CONNECTION RELIANCE CAN BE PLACED UPON THE DECISIO N OF ITAT DELHI BENCH IN THE CASE OF GOETZE (INDIA) LTD. VS. CIT (2009) 3 2 SOT 101 (DEL) WHEREIN IT HAS BEEN HELD THAT PROVISIONS OF SUB-SEC. (2) & (3) OF SECTION 14A CANNOT BE IMPORTED INTO CLAUSE (F) OF THE EXPLANATION TO S EC. 115JA OF THE ACT. IN THIS VIEW OF THE MATTER WE THEREFORE DELETE THE D ISALLOWANCE OF EXPENSES CONFIRMED BY THE CIT(A) WHILE COMPUTING BOOK PROFIT UNDER SEC. 115JB OF THE ACT. IN OTHER WORDS NO ADDITION TO THE BOOK P ROFIT SHALL BE MADE ON ACCOUNT OF ALLEGED EXPENDITURE INCURRED TO EARN EXE MPT INCOME WHILE COMPUTING INCOME U/S 115JB OF THE ACT. THUS THIS GROUND NO.2 IS DECIDED IN FAVOUR OF THE ASSESSEE. 12. GROUND NO.3 IS AS UNDER:- 3.0 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE CIT (APPEALS) WAS NOT JUSTIFIED AND GROSSLY ERR ED IN CONFIRMING NON-QUANTIFICATION OF UNABSORBED DEPRECI ATION TO BE CARRIED FORWARD TO SUBSEQUENT YEARS. 13. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. 14. THE ISSUE RAISED IN THIS GROUND IS BEING RESTOR ED BACK TO THE FILE OF THE ASSESSING OFFICER TO QUANTIFY THE UNABSORBED DEPREC IATION OF THE CURRENT YEAR TO BE CARRY FORWARD TO THE NEXT ASSESSMENT YEA R AS PER PROVISIONS OF SEC. 32(2) OF THE ACT. THE AO SHALL PROVIDE REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THE ASSESSEE SHALL PRODUCE ALL THE DETAILS OF 8 DEPRECIATION BEFORE THE AO SO AS TO ENABLE HIM TO D ECIDE THE ISSUE IN ITS RIGHT AND CORRECT PERSPECTIVE AND AS PER THE PROVISIONS O F LAW. WE ORDER ACCORDINGLY. 15. IN THE RESULT THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED IN THE MANNER AS INDICATED ABOVE. 16. THIS DECISION IS PRONOUNCED IN THE OPEN COURT O N 18 TH FEBRUARY 2011. SD/- SD/- (G.E. VEERABHADRAPPA) (C.L. SETHI) VICE PRESIDENT JUDICIAL MEMBER DATED: 18 TH FEBRUARY 2011. COPY OF THE ORDER FORWARDED TO:- 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR BY ORDER *MG DEPUTY REGISTRAR ITAT.